The lease detail most property buyers get wrong

Most buyers see a lease at below-market rent and read it as a problem to negotiate around. Often it's the reason they have less competition to negotiate against.

Here's the mechanic most people miss. A property with six months or more left on a below-market lease can't deliver vacant possession any time soon. That rules out most owner-occupiers immediately, since they need to move in within a reasonable timeframe. It leaves investors, who are comfortable holding an existing tenancy, as close to the only buyer pool left. First home buyers who don't need to move in straight away, for instance those still living with family, are one of the few exceptions. Occasionally you'll find a lease considerably longer than that, which cuts the buyer pool down even further.

Fewer buyers changes the negotiation. Less competition, on its own, tends to soften a price, which improves your starting yield even while the lease is still under market.

That's before you even ask why the property is on the market. A seller carrying an under-market lease often has a specific reason for offloading. Sometimes it's tied to the same lease keeping other buyers away, not just uninterested owner-occupiers, but a seller who's been waiting for the right kind of buyer to turn up.

The upside shows up later, at renewal. Either the existing tenant renews closer to market rent, or the property becomes available to re-lease at the current rate. One client purchase illustrates this well. The rent was under market at the time of purchase, and within a year of settlement, the tenant broke the lease early, and the achievable rent had moved from $600 a week to $650. The gap that made the entry price negotiable became the gain once the property came back onto the market.

This isn't guaranteed to resolve the same way every time. Whether the rent actually reaches market depends on the rental market at renewal, on tenancy law in that state governing how much and how often it can move, and on whether the location's own growth case still holds if that gap never fully closes. Confirm all three before you factor the increase into your numbers, not after.

The constraint worth naming here is settlement timing and finance. Not every lender treats an under-market lease the same way when assessing serviceability, so this only works cleanly if your lending position already accounts for it, rather than assuming the numbers will simply work themselves out.

The trade-off is patience. You're accepting a lower rental return for longer than a fresh lease would give you, in exchange for fewer competing buyers, often a more motivated seller, and a rent that has room to move once the lease turns over.

The rule worth taking from this: an under-market lease can buy you less competition and a better entry price, but only if the fundamentals underneath it would still justify the purchase even if the rent never fully recovers.

Where else might something that looks like a downside actually be narrowing the field in your favour?

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Disclaimer: The information in this article is general in nature and does not take into account your personal objectives, financial situation, or needs. It is not financial, legal, or tax advice. The Nelis Group accepts no liability for actions taken based on this content. You should seek independent advice from a relevant licensed professional before making any decisions and always confirm the latest rules and thresholds with your state revenue office or relevant authority.